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Are Estimates of Non-Standard Employment Wage Penalties Robust to Different Wage Measures? the Case of Zero Hours Contracts in the UK

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Are Estimates of Non-Standard Employment Wage Penalties Robust to Different Wage Measures? the Case of Zero Hours Contracts in the UK DISCUSSION PAPER SERIES IZA DP No. 13548 Are Estimates of Non-Standard Employment Wage Penalties Robust to Different Wage Measures? The Case of Zero Hours Contracts in the UK Egidio Farina Colin Green Duncan McVicar JULY 2020 DISCUSSION PAPER SERIES IZA DP No. 13548 Are Estimates of Non-Standard Employment Wage Penalties Robust to Different Wage Measures? The Case of Zero Hours Contracts in the UK Egidio Farina Queen’s University Belfast Colin Green Norwegian University of Science and Technology and IZA Duncan McVicar Queen’s University Belfast and IZA JULY 2020 Any opinions expressed in this paper are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but IZA takes no institutional policy positions. The IZA research network is committed to the IZA Guiding Principles of Research Integrity. The IZA Institute of Labor Economics is an independent economic research institute that conducts research in labor economics and offers evidence-based policy advice on labor market issues. Supported by the Deutsche Post Foundation, IZA runs the world’s largest network of economists, whose research aims to provide answers to the global labor market challenges of our time. Our key objective is to build bridges between academic research, policymakers and society. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. ISSN: 2365-9793 IZA – Institute of Labor Economics Schaumburg-Lippe-Straße 5–9 Phone: +49-228-3894-0 53113 Bonn, Germany Email: [email protected] www.iza.org IZA DP No. 13548 JULY 2020 ABSTRACT Are Estimates of Non-Standard Employment Wage Penalties Robust to Different Wage Measures? The Case of Zero Hours Contracts in the UK* A range of evidence suggests that non-standard jobs, including fixed-term and other temporary jobs such as casual jobs, pay lower wages than more standard, permanent jobs, even after controlling for differences in worker and job characteristics. A recent literature suggests this is also the case for zero hours contracts (ZHCs), a growing form of non-standard employment in several developed countries, including the UK. These studies typically rely on derived wage variables – derived from survey responses to questions on earnings and hours data – which are prone to various forms of measurement error, some of which may be correlated with employment contract. Many relevant surveys, however, also include stated-rate hourly wage questions which, although also likely measured with error, are not subject to the same measurement issues. This suggests potential for sensitivity in non-standard employment wage penalty estimates depending on the wage measure used. Using the example of ZHCs in the UK, we first use derived wages to replicate the ballpark conditional ZHC wage penalty typical of existing studies. We then show that there is no conditional ZHC wage penalty, on average, when using the stated-rate hourly wage measure. This also holds for other non-standard employment types, including casual and fixed-term employment. Further, whereas the derived wage measure suggests, in line with existing literature, that the ZHC wage penalty is largest at the bottom of the wage distribution, we show the opposite to be the case when using the stated-rate wage measure. We discuss implications for policy, our understanding of labour market behaviour, and also for the wider literature on non-standard work wage penalties. JEL Classification: J21, J48, M55 Keywords: zero hours contracts, casual jobs, non-standard employment, precarious employment, atypical employment, wages Corresponding author: Duncan McVicar Queen’s Management School Queen’s University Belfast Riddel Hall 185 Stranmillis Road Belfast BT9 5EE United Kingdom E-mail: [email protected] * This research was funded by Leverhulme Trust Research Project Grant RPG-2017-314, which we gratefully acknowledge. We also gratefully acknowledge the Office for National Statistics and the UK Data Archive for access to unit record data from multiple waves of the UK Quarterly Labour Force Survey and from multiple cohorts of the UK Longitudinal Labour Force Survey used in this paper. The findings and views reported in this paper are those of the authors and should not be attributed to the Leverhulme Trust or any of the organizations listed above. 1. Introduction Across a range of developed economies there have been substantial increases in the share of workers in what can be described as non-standard employment arrangements. While the specific form of these contractual arrangements is heavily dependent on country-specific institutional and legal frameworks, a common feature is a reduction in job security often combined with greater hours variability. This has given rise to a range of concerns regarding potential negative effects on worker outcomes, with the effect on wages being a focus of both researchers and policy makers (e.g. OECD, 2015; Taylor et al., 2017; Lass and Wooden, 2019). This is a critical point. If the characteristics of non-standard employment contracts are broadly undesirable then they should generate compensating wage differentials or other offsetting desirable characteristics (Rosen, 1986). For example, workers for whom short-term variability in hours and even earnings generates disutility should receive higher wages in compensation. Similar arguments follow in terms of the expectation of greater job insecurity on wages (Abowd and Ashenfelter, 1981). A lack of wage compensation, or even the existence of wage penalties, would make it more likely that these changes in contractual arrangements reflect a decline in worker welfare, suggesting a role for policy intervention. In practice, a typical finding in the international literature is that non-standard jobs, including fixed-term and other temporary jobs such as casual jobs, appear to pay lower wages than permanent jobs, even after controlling for differences in observable (and in some cases time-invariant unobservable) worker and job characteristics (e.g. Booth et al., 2002; Hagen, 2002; Forde and Slater, 2005; Mertens et al., 2007; Jahn and Pozzoli, 2013). Recently, the UK has witnessed a rise in a specific form of non-standard employment, zero hours contracts (ZHCs), that exhibit both job insecurity and short-term hours variability (Datta et al., 2019; Farina et al., 2020). Again, as with other forms of non-standard employment, this has led to concerns about worker outcomes including wages. At first glance the evidence with respect to wages appears strong. Several recent studies have shown that wages are lower in ZHC jobs than in other types of jobs in the UK, with estimated unconditional hourly wage penalties typically between 30% and 50%, which remain large (in the order of 5% to 9%) even after conditioning on observable job and worker characteristics (Adams and Prassl, 2018; Clarke and Cominetti, 2019; Datta et al., 2019; Gardiner, 2016; Koumenta and Williams, 2019; TUC, 2014). No studies report a ZHC wage premium or the absence of a ZHC wage penalty. In addition, Gardiner (2016) shows that the pay penalty appears to be larger towards the bottom of the wage distribution, where concerns over declines in job quality are most acute. Where studies in the wider non-standard employment literature examine wage effects across the distribution, they also tend to find larger wage penalties towards the bottom of the wage 3 distribution and smaller wage penalties, or in some cases a wage premium, at the top (e.g. Mertens et al., 2007; Lass and Wooden, 2019). This wage penalty literature, including that for ZHCs, typically relies upon wage information that is derived from survey responses to questions on earnings and hours data, and these are particularly prone to measurement error (for examples of such studies see Booth et al., 2002; Hagen, 2002; Forde and Slater, 2005; Mertens et al., 2007; Lass and Wooden, 2019; for a discussion of measurement error in derived hourly wages, and its econometric consequences, see Bound et al., 1994).1 If this measurement error is uncorrelated with employment contract then, although it may lead to imprecise estimates of contractual wage penalties, it will not bias estimates. This seems probable for some sources of measurement error in derived wages but not others. For example, rounding in reported hours and earnings is likely uncorrelated with employment contract. However, there are other sources of measurement error that may be correlated with contractual status. One concern is if reported periods for earnings and hours do not match. A symptom of this is that wage distributions using derived measures have been found to be wider than those using alternative wage measures, e.g. as reported by employers, and with many implausible values (Ormerod and Ritchie, 2007). This may be more problematic for workers, such as those in non-standard employment, whose hours and earnings may vary considerably from week to week. Another potential concern with reported hours in this context is the scope for differential inclusion of unpaid hours by survey respondents under different contracts. Previous research suggests that unpaid hours are widespread among ZHC workers (Datta et al, 2019). Importantly, and as we argue further, both could lead to consequential bias in estimates of contractual wage penalties. An alternative to this kind of derived hourly wage measure exists in many of the surveys used to date in the wage penalty literature.2 These surveys all include stated-rate hourly wage questions for workers paid an hourly rate. Naturally, these stated-rate measures are also susceptible to measurement error, e.g. related to rounding, but arguably do not suffer from the same potential mismatch between hours and earnings periods, or inclusion of unpaid hours. Furthermore, these two wage measures capture slightly different things, both of which are potentially interesting.
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